Managing China Subsidiaries during the COVID-19 Epidemic

By Sven-Michael Werner, Grace Zhao

04-2020

Relevant Legal Issues and Countermeasures in relation to Corporate Governance and Compliance. Responding to the outbreak of Covid-19 epidemic (the "Epidemic") has become the top priority of global enterprises. Travel and entry restrictions ("Restrictions") imposed by various countries and regions around the world in response to the Epidemic will cause problems, obstacles and challenges to corporate governance, compliance and many other aspects.

Can Board Meetings be Held Remotely?

Compared with foreign countries, the Epidemic in China has eased though China is still under pressure to detect and control imported and asymptomatic cases. Many enterprises in China continue to use home office and shift work arrangements to slowly resume business while minimizing the impact of the Epidemic on their business operation. The Restrictions, as well as the way of working from home and working in shifts, are likely to have a substantial impact on various corporate functions such as the convening of board meetings. Although the Company Law of the People's Republic of China ("PRC") does not dictate the frequency, method and location of physical board meetings, in practice, many companies' articles of association provide for such requirements for the validity of meetings. As such, a company may need to modify its articles of association to ensure that board meetings can be held in the form of a remote meeting.

If changes are required, companies should start to prepare the necessary procedures for the alteration of articles of association or company registration information well in advance as availability of instant courier services for the application documents to be signed by investor representatives overseas cannot be guaranteed due to the Epidemic.

What if the Legal Representative is Stuck Overseas?

Upon a company's establishment or amendment of its registration information, the company registration authority will not require its legal representative to be present in person. However, for newly established companies, after the completion of company registration formalities, subsequent bank account opening and tax registration procedures may require the legal representative to attend to on-site procedures.
With respect of the bank account opening, according to the regulations of the Central Bank and the Banking Regulatory Commission of China, banks must verify the identity of customers as part of mandatory Know-Your-Client (KYC) procedures when opening bank accounts for them. Therefore, banks tend to require the legal representative of a company to go through the account opening procedures in person at bank offices. If, due to the Restrictions, foreign legal representatives are not able to be present in person hindering the completion of the account opening, we suggest concerned companies to negotiate with their bank to complete identity verification via remote video links. Banks with branches in the country where the foreign legal representative is domiciled may accept to conduct the KYC procedures overseas.

Similarly, the cancellation of some bank accounts (such as accounts which were suspended for various reasons) may also require the legal representative's presence. For tax registration procedures, the policy requirements vary from place to place. For example, in Beijing, tax registrations require the legal representative's real name authentication. Chinese legal representative can complete real name authentication through relevant mobile phone application programmes, but foreign legal representatives shall verify their identity on-site. In Shanghai, the real name authentication procedure for Chinese legal representatives is similar to that of Beijing, but foreign legal representatives may entrust another management personnel of the company in China to handle tax affairs through executing a power of attorney.

Electronic Signatures

Furthermore, if a legal representative or director of the company is unable to enter China for a short period of time due to the Restrictions, the company may consider using electronic signatures. However, the use of electronic signature is a complex issue. Not all contracts or documents can use electronic signatures. Article 3 of the Law of the PRC on Electronic Signature explicitly excludes the application of electronic signature in the following legal documents: (1) documents concerning personal relations, such as marriage, adoption and succession, etc.; (2) documents concerning the termination of water supplies, heat supplies, gas supplies or other public-utility services; and (3) other circumstances under which electronic documents do not apply, as prescribed by laws and administrative regulations.

In practice, when a company intends to change its registration information (such as registered capital, company name or address, shareholders, directors, etc.), the company registration authority only recognizes the signature by hand but not electronic signatures. In addition, if a contract is governed by foreign law or may be used for registration or filing in a jurisdiction other than China, or one party using the electronic signature is a foreigner, the assistance of a local counsel is necessary to ensure the authenticity, legality and effectiveness of the electronic signature. Therefore, given the limitations of electronic signatures and the speed of international logistics for document delivery are affected by the Epidemic to various extent, if a company considers that it is necessary to re-appoint a new legal representative domiciled in China, it needs to modify the articles of association of the company and apply for changing registration information with the company registration authority.

Localising Decision-making

Ultimately, if the Restrictions last for an extended period of time, e-signatures are not an option and decisions need to be made and executed quickly, localising such decisions is the only option for Chinese subsidiaries of multinational companies. For such localisation, it is important to set out clear rules for the decisions to be made, and then executed by respective signatures and company stamps or seals.

The company seals of many Chinese subsidiaries of multinational companies are sometimes held by foreign legal representatives. If, due to the Restrictions, the foreign legal representative cannot return to China within a short period of time, such seals may need to be handed over to someone in China. Instead of having them kept by the local management the company may enter into a custody arrangement with a third-party institution such as a law firm in China to keep the company seals and assist with affixing the seals when the company's business so requires.

Moreover, in certain cases where practical supervision and management of the operation of the Chinese subsidiaries was exercised by headquarters by frequently sending visits of foreign operational staff to conduct on-site inspections, the headquarters may consider stipulating more stringent control and approval rights of (foreign) shareholders so as to ensure that the headquarters has visibility of developments of local business and compliance of its local subsidiaries.

Personal Information Processing

In order to comply with various Epidemic related requirements companies in China may collect personal information of employees for the purpose of epidemic prevention and control. For such purpose, in principle, an employer can lawfully collect epidemic related information of employees, but the process of which will inevitably involve other personal information processing activities such as storage, use, transmission, disclosure of personal information. Therefore, employers shall (a) comply with the data protection provisions as set out in the General Rules of the Civil Law of the PRC, Cyber Security Law of the PRC and relevant national standards (in particular the Information Security Technology - Personal Information Security Specifications), (b) follow the principles of legality, legitimacy and necessity, inform employees of the rules of the collection and use of information, and (c) articulate the purposes, means and scope, and obtain employees' respective consent. Therefore, companies should consult with legal counsel before taking actions to cope with typical situations like these:

1) For employees who return to China from relatively high-risk countries or regions (such as Europe or the United States):

- Whether employees can be tracked or be required to provide recent travel records and isolation measures;
- How to deal with the situation where employees refuse to provide, conceal or falsely report personal information related to the epidemic.

2) For employees who have been confirmed or suspected COVID-19 abroad:

-Whether companies can track their whereabouts and review their medical records to ensure that employees are fit to return to work, etc.